Understanding Islamic Finance - Doha Academy of Tertiary Studies

296 Understanding Islamic Financesupplier and there is any delay in delivery of the asset to the lessee – the bank fails todeliver the asset to the lessee on the date specified in the Ijarah agreement – no rental isdue for the period between the agreement date and the date of actual delivery. Therefore,Islamic banks should enter into a “promise to lease” at the beginning and the actual Ijarahcontract should be executed at the time when the asset is made available by the supplier.While determining the rental, they can keep in mind the whole period for which theirfunds remain invested, i.e. the supply period and the lease period.3. If any damage occurs to the asset during the supply stage, the lessee (client) serving asagent is not responsible for it until any fault on his part is proved. The rental, if receivedin advance, should be adjusted accordingly, unless it is agreed that the lease be extendedby an equivalent period after its original expiry date.4. Another problem relates to the fact that the usufruct is extended to the future and maytherefore be risky and unstable, particularly if the usufruct is reduced materially in thefuture. In this respect, Islamic law has the provision of cancellation of lease if any factorsor events cause the usufruct to be less than normally expected. For example, nearly allschools of Islamic jurisprudence allow the reduction or abolition of rental of land ifthe produce of leased farmland is damaged due to any natural calamity like drought,floods, etc. According to Imam Muhammad, if the crop of leased land is destroyed dueto any natural calamity, Ijarah will become invalid and the lessee will be entitled to aconventional wage. 535. A big problem emerges in the case of a default in payment of rental by the lessee, as thepenalty taken for late payment has to be given to charity.Another important aspect is that the general perception that Ijarah gives a fixed returnto the bank is not correct. As Islamic banks have to purchase assets for leasing, they haveto pay all expenses incurred in the process of their purchase, import, etc. The bank can,of course, include all these expenses in its costs and can take them into considerationwhen fixing the rental, but as a matter of principle, it is liable to bear all these expensesas owner of the asset. This also implies that discounts allowed by suppliers for the purchaseof leased assets would be the right of the Islamic bank, as it is the owner of theleased asset during the lease period. Banks also have to pay the major expenses relatedto ownership, like that of Takaful and other expenses necessary for the upkeep of theasset. A claim received from a Takaful company might not be sufficient to cover the lossor expense of repair. Hence, banks might not be able to get the targeted net return withcertainty.The solution to the above problems does not lie in stratagems leading to objectionablepractices and integrity problems for the movement of Islamic finance. IFIs must take careon two points. First, risk cannot be separated from ownership; as the leased asset remainsin their ownership, it must remain under their responsibility (Dhamān) and they musttake that responsibility. Second, lease and sale are contracts of two different natures; theymust be kept separate and independent of each other. If the above two aspects are takencare of, they can adopt any procedure for leasing the assets, mitigating the risks andtransferring ownership to the lessee through any of the methods discussed in the precedingparagraphs.53 Al-Kasani, 1993, 4, p. 514.